Capital Gains Manual

Entrepreneurs’ Relief: disposal of part of a business, factors arising from case law

The cases mentioned in CG64020 and CG64021 bring out the following points on how a business can be shown to have been disposed of.

It must be looked at from the vendor’s point of view. The question is whether the business (or part of it) has been disposed of, not whether any business has been acquired by a purchaser; there need be no acquisition of a business as a going concern.

It is not necessary for the vendor to get rid of all the assets in the business or the relevant part of the business at the same time. For instance, Mr Daffurn retained his covered yard in 1986, but the disposal still qualified for relief, and Mr Rawlings did not get rid of all his cattle at once, but was able to show that he had disposed of his dairy business.

On the other hand

It is not possible to dispose of a business, or a part of it, in stages. Mr Daffurn could not argue that the 1988 disposal of his yard was part of the 1986 disposal of part of his business as that earlier disposal had already been completed. Mr Rawlings’ disposals of his cows after completion of the milking parlour did not show that he had disposed of his dairy business as that disposal had already happened when milk production ceased. Mr Bourke’s sale of milk quota was not part of the disposal of dairying, as that had already occurred when he sold his herd.

A disposal of a substantial asset by itself will not prove that part of a business had been disposed of, even in farming cases where the asset is part of the farmland, so that the business is necessarily reduced in size after the sale. A simple scaling down of activities was not enough to show the land disposals by Mr Adcock, or Mr Dancer or Mr Johnston, constituted disposals of part of their business.

A possible exception to the previous point is a case where the asset disposal and its consequence for the business is so significant that, in the words of Peter Gibson J, “it may very well be (and I stress that [Fox J in Adcock] was using the language of possibility, not certainty, even in a case relating to the disposal of 95 per cent of the land on a farm) that an inference will be drawn of the sale of a business or part of a business.” However, even in this situation, the consequences of the disposal must affect the business directly and immediately, it is not sufficient, as Mr Powell’s case shows, that the business continues as before but on the basis of a far less certain future.

The judges have been extremely reluctant to use the test suggested in the words above. But if the changes to the business caused directly by the sale of the asset in question lead to the conclusion that the position is wholly different from the position before the sale it may be reasonable to say that the business after the sale is not the same as the one before it; so a business, or part of it, must have been disposed of.

A disposal of an asset will not, except in highly exceptional circumstances, constitute the disposal of a business, or part of a business. But it may be included in such a disposal. The following pointers can help to distinguish one situation from the other.

In considering when the disposal of the business (or a part of it) took place, it would be highly artificial to look at the position only at the date of contract for sale of the assets. To ignore events after the making of the contract (and before completion) would be to ignore the performance of the disposal itself.

It is legitimate to have regard to simultaneous disposals of other assets used in the business in assessing whether or not a particular disposal can be categorised as a sale of part of a business. Mr Rawlings’ sales of cattle between the date of contract and completion of sale of his milking parlour could therefore be taken into account in assessing whether there had been a disposal of his dairy business.

By contrast, the later disposals of cattle in 1989 were not events which could support the conclusion that Mr Rawlings had disposed of his business. The fact that the cattle were no longer used in the dairy business was not a sufficient connection.

Separate disposals of assets, possibly in different tax years, cannot be taken together in considering whether there has been a disposal of the whole or part of a business. “Unless there be some evidence to enable the two disposals to be treated as one, such as evidence that they were part of the same transaction, they must be treated separately” (Peter Gibson J at 61TC609I). The same approach was taken by Blackburne J. in Purves v Harrison.

In Knox J’s view in Rawlings, to take into account disposals of assets (in that case, cattle) after the business activity (dairying) had ceased, there would have had to have been “some connection established at the date of completion of the land transaction which enabled a later sale of cattle to be treated a part of the same transaction”.

If an asset is sold some time after part of the business has been disposed of, the fact that the asset in question was previously used in the relevant part of a business is not enough to show that it is comprised in that disposal of part of the business. See, for example, Mr Daffurn’s sale of his covered yard, and Mr Bourke’s sale of his milk quota.